Vix snaps back from rare lows

The so-called fear gauge is up 20% this week, but don’t be scared

SamMamudi

NEW YORK (MarketWatch) — One of the market’s measurements for investor sentiment suggests growing investor worry, but that doesn’t mean it’s time to panic.

The Chicago Board Options Exchange’s Volatility index, called the VIX
VIX, +20.38%
is up about 16% this week, a signal that traders expect increased volatility.

While that’s arguably the case this week, it’s also worth noting that the index is bouncing back from rare lows last week. While unrest in Greece and Spain and a pullback in the U.S. markets have doubtless contributed to the VIX’s rise, this week’s climb is also due to last week’s drop.

On Sept. 19, the VIX closed at 13.88, under 14 for just the third time in the past five years. On Sept. 21, it closed at 13.98. But as of Wednesday afternoon, it was just above 16 — a big move in percentage terms but well below its long-term average of 20.5, said Randy Frederick, director of trading and derivatives at Charles Schwab.

A widely-watched measure of volatility, the VIX is derived from prices for options linked to the Standard & Poor’s 500 index
SPX, -1.42%
; it typically drops as stock prices rise and vice versa.

It also has a reputation for bouncing around a lot.

“I like to say the VIX is like a pendulum — it tends to swing too far in either direction,” said Frederick. “It was at an incredibly low level a week ago, and when it gets that low it has a tendency to snap back.”

Frederick noted that the latest move is similar to August’s trend, when the index rose in the final week after dipping below 14 mid-month.

After closing at 13.45 on Aug. 17 — its lowest close since June 2007 — the VIX steadily rose and closed at 17.98 on Sept. 4 before falling again to its mid-month low.

Last week’s low was prompted by stocks’ strong performance in September on the back of the Federal Reserve’s announced third round of quantitative easing, as well as hopeful noises from the European Central Bank. Some even pointed to the feel-good effect of Apple Inc.’s
AAPL, -1.53%
iPhone 5 launch as boosting the market.

The market mostly held last week, with stocks closing down less than 1%. But protests southern Europe and some profit-taking by traders after a strong summer have seen a bigger dip this week, with the S&P 500 down 1.6%, the Nasdaq Composite index
COMP, -1.84%
off 2.6% and the Dow Jones Industrial Average
DJIA, -1.35%
down about 1%. Read about Wednesday’s drop for U.S. stocks.

It remains to be seen whether the VIX will repeat its recent cycle and fall again in October, though with Nov. 6’s presidential election, and increasing chatter about the so-called fiscal cliff, there could be some increased volatility in the fourth quarter, noted Frederick.

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